Overview

Which regulatory changes could support efforts to create an enabling environment for real estate development?

RONALD CHAGOURY JR:A strong mortgage industry and regulations supporting this industry would revolutionise the real estate market in Nigeria. If we take the total outstanding mortgage in the market, we are looking at a very small figure – 0.5% of the GDP. In South Africa, on the other hand, the total mortgage outstanding in the market represents 21% of the GDP – 42 times more than Nigeria.

At another extreme, this figure currently stands at 61% in the US. The potential for growth in this sector is unbelievable, and we will see this materialise in the years to come.

ODENIGWE IKE MICHAELS:Creating an enabling environment for the real estate sector is critical to boosting its development. One key issue that merits the government’s attention is reforming the Land Use Act. Commercial banks are reluctant to offer a loan to a developer unless they have a certificate of occupancy, but this can often take up to two years to obtain due to the bureaucratic red tape involved, such as the certificate requiring the signature of the state governor. To expedite the process that developers undergo to obtain the requisite documentation, the system for these types of permits and certificates should be localised.

ELIAS SAAD:Improving access to finance for property developers and construction companies could be a major boom for the industry, and is an area where the government could help. With local banks often offering double-digit interest rates for loans, many firms are hamstrung by the high cost of capital. The government could work with the appropriate entities to reduce interest rates. Another important regulatory issue that can be addressed is for the government to simplify and accelerate approval processes for land titles and relevant permits. Some developers face lengthy delays due to slow processes.

VINAY MAHTANI:The present regulatory landscape does not make life easy for developers. Firstly, the actual laws in place do not support development, and require amending. An example is the vague law around property enforcement and mortgage security rights: without the ancillary law to efficiently securitise and foreclose on property, there is little incentive for lenders to lend. Secondly, the administrative work and bureaucracy around property transactions is extremely cumbersome, time-consuming and expensive; registering or transferring a property can take months and costs approximately 20% of the property value.

What impact will Nigeria’s rising middle class have on the value of grade-A commercial property in the country?

MICHAELS:In Nigeria grade-A commercial space is relatively limited, which allows property owners to charge relatively high prices. A growing middle class will only increase demand for first-rate commercial property. In Abuja, which is one of Africa’s fastest-growing cities, property values are increasing rapidly, at approximately 10-20% each year. In some cases, developers will not try very hard to rent out their building’s space, but rather wait five years and sell the property for a profit. The government must create more incentives to encourage the renting of properties.

SAAD:2015 was a great year for grade-A offices coming on-stream and there are many other projects slated to be completed in 2016.

While the supply of grade-A commercial property is increasing, more challenging economic circumstances – mainly due to lower global oil prices – have tempered demand. That said, Nigeria’s emerging middle class presents opportunities for many involved in the real estate market, particularly in commercial projects.

Initiatives such as the Eko Atlantic are geared towards providing Lagos with a new business centre. I believe that as Africa develops as a region, Eko Atlantic has the potential to be an economic hub for the entire continent. As the initiative matures there will be less congestion in areas such as Victoria Island and Ikoyi. In the long-run, there are boundless gains to be made in Nigeria’s commercial property market.

CHAGOURY:Over the coming 15 years, we will see a very strong increase of Nigerians moving into the middle-income bracket. With this increase, we will also see a rise in the need for grade-A commercial properties. As more international companies come to Nigeria, as more Nigerian companies grow and as more businesses start up, all to service the fast growing population with an increase in disposable income, the office space requirements will keep on growing to house these companies.

If we look at the growth in grade-A commercial real estate over the past 20 years in other emerging countries such as China and India, we can see how industrialisation, the increase in consumption and the rise in spending capacities have impacted the real estate markets. When we compare the supply of new office space coming on-line here to cities in other major emerging countries, the numbers still remain small. We will see the same growth in demand happen to Nigeria over the coming 10 to 20 years.

MAHTANI:As the middle class of any country expands, increased purchasing power means a naturally greater demand for more varied goods and services. This would in turn support the creation of jobs, and thus the requirement for commercial property, including Grade-A space, would increase. Nigeria has tremendous long-term potential, though today, its sliding currency is pushing the middle class back towards the poverty line and the immediate need for commercial property remains stagnant.

How would you characterise investor interest in residential versus commercial real estate?

SAAD:When investing in either Nigeria’s residential or commercial property market, it is important to keep a long-term perspective. The country’s comparative advantage is the large size of the population and upward trend of incomes. In the coming decades, there will be tens of thousands of families who reach middle-income or upper-income status. This will drive demand in both the residential and commercial real estate space.

MAHTANI:Investor interest for different types of real estate really depends on the nature and risk appetite of the investor. In Nigeria, recent investment in commercial property has largely been dominated by the international funds, which require the security of long-term lease covenants from blue chip multinationals and revenues in hard currency. Investment in residential property, where leases are short and tenant profiles are diverse, has been better suited to the local players, who perhaps understand the intricacies of the market slightly better and whose funds do not have such stringent timelines.

CHAGOURY:If we look nationwide, I would say that the scale leans more towards residential, where the demand for housing far exceeds the supply. In Lagos, however, there is strong interest in both commercial and residential real estate.

MICHAELS:In general, there is more interest in residential real estate than in commercial. Despite being originally designed for 2m to 3m people, Abuja currently has 6m residents, so demand is important. That being said, high-quality commercial property opportunities will always be attractive. You will find that some prestigious companies in Nigeria have difficulty finding grade-A commercial space and, accordingly, will construct their own building. Projects like Eko Atlantic in Lagos and Centenary City in Abuja should alter the commercial real estate landscape by providing numerous grade-A commercial offerings.

Given the housing deficit in urban areas, what incentives could boost private investment in affordable, low-income housing initiatives?

MAHTANI:The provision of affordable housing is essential for community development, and while the government can play an important role as an enabler – through tax incentives, subsidies and land grants – it is the private sector that will be the ultimate driving force. However, today, there are several factors, most importantly the lack of reliable mass consumer finance, that make housing largely unattainable to the end user and unattractive to developers.

Attempts have been made to make mortgages more widely available, such as the government-inspired, private sector-led Nigerian Mortgage Refinance Company (NMRC), which was set up in 2014. While the NMRC is a step in the right direction, the amount of funds raised is vastly inadequate given the deficit of approximately 17m homes nationwide. In order to attract the private capital required to fund such mortgages, it is crucial that the government creates a robust ecosystem through the application of appropriate legal, regulatory and tax policy. This is far more important step than any short-term government incentives.

SAAD: Over the past few decades, most developers in Nigeria have focused primarily on the luxury end of Lagos’s residential real estate market. The country faces a significant affordable housing deficit, with numbers such as 17m often cited. It is therefore important for more efforts to be made in providing low-income housing options.

A challenge some developers face in this regard is making a profit from these types of projects. When developing low-income housing, it is important to keep costs down and not forget the demographics of the project’s targeted residents. Too often developers get carried away with unnecessary excesses, which has the effect of ultimately driving up the cost of flats and pricing out the targeted residents.

MICHAELS:With a widening housing deficit, this issue has never been more critical. Setting up a functional and enabling environment is paramount to increasing investment in low-income housing. The private sector should be the engine of growth for real estate, but developers need incentives to execute projects. In terms of developing infrastructure, the government should offer a basket of incentives and help with feasibility studies to get projects to a bankable level.

By lowering the cost of doing business through incentives to builders, the government would reduce the cost of construction and, in effect, create more affordable housing. Coupled with improvements in the mortgage industry, Nigerians should, over time, find more opportunities in the low-income housing market.

CHAGOURY:Affordable mortgages are key to the development of affordable housing. With competitive mortgages, the market for affordable housing will expand significantly, which will lead to more investment. There are a number of construction techniques available or coming online that can reduce the cost of construction. Also important to note, affordable should not mean low-quality housing. By designing more efficient and compact spaces, the total cost of housing can go down, while also allowing for good-quality construction.